Aug 27, 2019

This article is a continuation of RDC’s quarterly review of European low-cost airline performance using data from the Apex subscription platform, www.rdcapex.com. The analysis covers all routes operated by Ryanair, easyJet, Norwegian, Wizz Air, Vueling, Eurowings, Jet2, Transavia Netherlands, Transavia France and Blue Air. Profit estimates are adjusted to match the reported EBIT profit levels published by each airline where available

After what seems like an eternity of passing on negative news through our quarterly analysis of LCC profits, or to be more accurate lack of profits, I am delighted to announce that the negative news has turned to a degree of positivity. Or alternatively the positive news is negative, you can decide. We estimate that our group of Europe’s largest LCCs has reported only a small decrease in profits in quarter 2 2019 compared to the same quarter in 2018. So how can we say a reduction in profits is positive? Look back to the last two quarters where losses widened in each by around €500 million. This quarter has a reduction of only €15 million (2% lower) so I am taking that as being positive.

However to dampen too much excitement it should be noted that the results this year were boosted by Easter being mid-April, and therefore it’s positive impact all contained within quarter 2, whereas last year’s Easter impact was split between the end of March and beginning of Easter so quarters 1 and 2.

Estimated EBIT Profit by Quarter for Europe’s top LCCs – 2016 to 2019

Most other financial indicators were generally positive in the quarter with increases to passengers, load factor, yield and revenue. An extra 9.5 million more seats were offered this year with 9 million more passengers carried. Revenue growth didn’t outperform costs though so there was a drop in profit margin but a 1% decrease is not anything to be too concerned about.

On an individual airline basis performance was mixed, some increasing profits this quarter and some not. Ryanair, which includes Laudamotion, and easyJet remain the two largest and most profitable airlines but both recorded a decrease in profits in this quarter compared to last year. We estimate that Ryanair’s profits decreased the most in terms of both volume and percentage, profits down by €97 million representing a 26% decrease so in comparison easyJet performed quite well with only a 11% decrease. 5 of the 10 carriers improved their performance these being Wizz, Vueling, Norwegian, Blue Air and Jet2. Norwegian had the largest increase in (EBIT) profits going from €16 million last year to €63 million this year, a significant increase. However, it should also be noted that the airline reported losses at EBT level once the negative impact of a change to how the airline accounts for leasing charges was taken into account (IFRS 16).

EBIT Profit Breakdown by Airline – Quarter 2 2019 vs Quarter 2 2018

The chart below now looks at the level of route profitability by country, the order is passenger market size with the Spain being the largest. Of the 15 countries listed on this chart only Germany recorded a loss in quarter 2 of 2019.

Only 5 of the largest 15 countries had a year on year increase, these being the UK, Norway, Switzerland, Romania and Denmark. Increased competition on Europe’s larger markets no doubt taking its toll. Germany epitomises this being the only large country market where LCCs again posted an overall loss and is still reducing year on year. The largest profit decrease was on routes to/from Italy, profits have reduced by €50 million this quarter.

Perhaps surprisingly UK routes had the largest increase in profits, €67 million higher than last year. This goes against some of the rhetoric from the airlines who cite Brexit as a major drag on profitability. When we drill into the route level data, we can see that the improvement comes from the withdrawal of some heavily loss-making bases/routes and the maturation of some others. So probably not a market driven recovery but a degree of right sizing improving performance.

This chart below looks at the most profitable country markets and extends the time period to cover the full 12 months to the end of quarter 2 2019 comparing against the previous 12-month period to the end of quarter 2 2018.

EBIT Profit by Country (Best Performing) – Year on Year, 12 Months to End of Quarter 2

What stands out in this chart is the reduction in profits on routes to/from Spain. Over the last few years airlines have moved significant capacity from other leisure sun markets such Turkey, Egypt, Tunisia to Spain and of course for every new LCC base created comes a host of new routes to Spain. It is still the most profitable country market for this group of LCCs but profits are now a lot closer to the next two markets of UK and Italy. And as discussed earlier profits on routes to/from Italy are themselves experiencing a reduction in profitability, again impacted by increased and fierce competition.

EBIT Profit by Country (Largest losses) – Year on Year, 12 Months to End of Quarter 2

Routes to/from Germany recorded the largest overall loss in the 12 months to June 2019 with a deficit of €225 million, profits have been impacted by loss making Air Berlin routes being absorbed into Eurowings and easyJet and significant expansion by Ryanair and Laudamotion. It’s a much smaller market but Austria also has similar market dynamics with losses widening.

The USA market has the second largest loss but its encouraging to see that it appears to be stabilising with a year on year reduction of only €4 million. This is of course mostly driven by Norwegian, and to a lesser extent Eurowings, so performance may start to improve as loss making routes continue to be withdrawn. Some of Norwegian’s long-haul route cancellations are from Sweden so this market will also probably improve.

This next chart looks into LCC profitability at the individual route level for the 12 months up to the end of quarter 2 2019 against the previous period.

Profit breakdown by route – Year on Year, 12 Months to End of Quarter 2

Profitable routes are those assumed to have a profit margin of 10% or more, breakeven levels are assumed between positive 10% and negative 10% and loss-making routes are those below negative 10%. This airline group between them flew over 6,000 unique airline/route combinations in the most recent 12-month period adding around 400 new routes.

Not surprisingly, based on the figures we’ve reviewed so far, our analysis shows that there is a decrease in the number of profitable routes and an increase in loss making. The number of profitable routes has decreased by 7% whilst loss making routes have increased by 34%. Routes operating at around breakeven have increased by 21%. On closer examination of individual markets, it is clear to see that most of the new routes that have been introduced are loss-making and many previously profitable routes have decreased to breakeven or losses depending on the competitive environment.

The next chart breaks down route performance by airline, displaying the proportion of routes that are operating profitability, those at breakeven and those that are loss making.

Profit breakdown by airline – Year on Year, 12 Months to End of Quarter 2

Of the larger airlines Wizz has the highest proportion that are profitable with 61% of all routes operating at a profit. Wizz has knocked Ryanair, with 58%, of top spot. Transavia France has the highest proportion of all the other smaller airlines with 52%. Eurowings has the highest proportion that are loss making with 49% followed by Norwegian with 34%. easyJet also has quite a high proportion that are loss making, 26% of their routes which compares to only 16% for Ryanair and 10% for Wizz.

The next chart shows the move in percentage points for each profit grouping between the last 12 months to June 2019 compared to the year previous.

Annual Variance in Route Profitability – Year on Year, 12 Months to End of Quarter 2

For example, the proportion of profitable routes at Ryanair, coloured in blue, has decreased by 12 percentage points in the last 12 months to June 2019 whilst the proportion of loss-making routes has increased by 5 percentage points.

Of all the airlines analysed easyJet’s network has changed the most with loss making routes increasing by 11 percentage points and profitable routes decreasing by 17. easyJet and Eurowings have the largest percentage point increase in loss making routes each with 11 percentage points more. In contrast several of the smaller airlines decreased the proportion of loss-making routes - Blue Air decreased by 9 percentage points, Transavia France by 6, Jet2 by 4 and Vueling by 2.

easyJet also has the largest decrease in the proportion of profitable routes decreasing by 17 percentage points followed by Ryanair who decreased by 12 percentage points then Eurowings at 11 emphasising the highly competitive markets that these carriers are operating in. 4 airlines increased the proportion of profitable routes – Transavia France increased by 3 percentage points and each of Wizz, Vueling and Blue Air increased by 2 points. The most stable networks where there has been minimal variance in performance are Wizz, Norwegian, Vueling and Jet2.

This chart now looks at future fare availability giving an indication of how yields may perform for the last few months of 2019.

Year on Year Fare Forecast up to December 2019

Apex already has historical fare data up to July 2019 with July softer this year over last and very close to 2017. Fares collected for future departure months continue to track lower than last year. There appears still to be a fare premium over 2017 in August and September but further out fares collected so far are lower than the last two years. Let’s hope we see fares increase as we get closer to departure but based on current performance, and fuel prices staying stubbornly high, I expect profits in quarter 3 to be close to what was achieved last year but I’m not so confident about quarter 4!